(Bloomberg News) Federal Reserve Bank of Kansas City President Esther George said that central bank policy makers must consider whether they are increasing the odds of instability in the financial system.

"Policy choices that attempt to speed improvement in the housing and labor markets can be attractive given these circumstances," George said, referring to the "weak housing market, high unemployment and impaired bank balance sheets."

"But this desire must be traded off against the need to foster long-term stability within our financial sector," she said in her first speech since becoming a regional Fed president in October.

The remarks indicate that George shares a key concern of her predecessor Thomas Hoenig, who dissented from all Fed policy decisions in 2010 with the warning that a prolonged period of zero-interest rates could provoke turmoil in financial markets. Fed regional bank presidents rotate voting on monetary policy, with George first voting in 2013.

Asked whether the Fed could do more to stimulate economic growth and bring down unemployment, George said that such actions may run risks.

"My view is that the economy is going through a deleveraging process and that takes time," George said in response to an audience question. "Efforts to speed up that process run some risks. It's going to take things other than interest rates to stimulate that economy."

"The actions we've taken will have some time to play out as it is and we'll have to see how data come in to make the decision about whether any further action is appropriate," George said.

Some institutions appear to be increasing their exposure to risk, George said in her speech.

"Some bankers with strong balance sheets tell me they must react to the current environment by taking on more risk," she said. "While appropriate risk-taking is fundamental to banking and desirable in this environment, creating conditions that encourage the financial system to take on mispriced risk could lead to distortions that will only haunt us later," she said.

Bank Supervision

George was the Kansas City Fed's No. 2 official under Hoenig, who retired last year. She joined the Fed in 1982, spent much of her career in bank supervision and became first vice president in 2009.

From 2001 to 2009, she was senior vice president in charge of the Division of Supervision and Risk Management, overseeing regulation of the Kansas City Fed district's 170 state-chartered member banks and almost 1,000 bank and financial holding companies. She worked in Washington in 2009 as acting director of bank supervision for the entire Fed system.

The recovery following the recession that lasted from 2007 to 2009 has been "uneven and underwhelming," George said.

"With moderate economic growth have come modest job growth and a too-high unemployment rate, in addition to lingering doubts about whether the recovery is sustainable," she said.

Payroll growth in the U.S. beat forecasts in December and the unemployment rate dropped to the lowest level in almost three years as the economy gained strength heading into 2012, the Labor Department said last week.

Final Month

Employers added 200,000 jobs in the final month of 2011 and the jobless rate fell to 8.5 percent, down from 9 percent in September and 9.4 percent in December 2010.

For all of 2011, employers added 1.64 million workers, the best year for the American worker since 2006, after a 940,000 increase in 2010. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009.

Only part of the economy's weak growth can be attributed to temporary factors such as the natural disaster in Japan, political turmoil in the Middle East and the fiscal debt crisis in Europe, George said.

"A considerable drag on the recovery remains the consequences of the buildup in leverage leading to the financial crisis," she said. "All of this suggests a moderate recovery remains the most likely outlook, depending on developments in Europe and Asia's economies, as well as U.S. fiscal policies that have yet to be defined," she said.

George said one of the largest risks is that the European debt crisis may spread to the U.S. through the financial system.

"When I think about risks to our economy, in terms of whether Europe goes into a recession, and some have said they may be there now, I worry more about things like financial contagion that could come across," George said. "You see a lack of confidence. You see characteristics that we saw back in 2008."

Processing Checks

The Kansas City Fed is one of the 12 regional banks that aid in supervising commercial banks and processing checks as well as reporting on regional business conditions. The Kansas City district represents Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and the western third of Missouri.

George said that one area where risk may be mispriced is farm land, also a concern of her predecessor Hoenig in his final year as Kansas City Fed chief.

"Each week brings a new tale of dizzying prices at the most recent farmland auction," she said. "I hear from many well-informed, concerned voices across our region wondering whether this could be a bubble.'

"These types of events have played out in the past, and the results were not kind to the industry involved or its banks," said George, 53. "There may be other sectors experiencing similar conditions that will not be obvious without the benefit of hindsight. This is a common pattern with mispriced risk."

Boost Economy

Some officials on the Federal Open Market Committee have continued to call for efforts to boost the economy and particularly the dormant housing market.

New York Fed President William C. Dudley said last week that "additional housing policy interventions" can help boost growth, and the Fed should consider further easing. Boston Fed President Eric Rosengren said he supported the purchase of mortgage-backed securities.

The average 30-year fixed rate mortgage was at a record low 3.91 percent last week in a Freddie Mac index. Those low mortgage rates have failed to revive home construction and purchasing which remain depressed. Builders broke ground on 685,000 homes at an annual pace in November, still 70 percent below the peak pace of 2.3 million homes recorded in January 2006.

"I view monetary policy as attempting to walk a fine line," George said. "On the one hand, today's policy settings are designed to encourage risk-taking and to stimulate much- needed growth across our economy. But on the other hand, experience has shown that pushing risk-taking too far can cause the mispricing of risk, the misallocation of capital and the ultimate weakening of financial firms' balance sheets."